The role of Fiscal Institutional Context on primary balance. A case study for European country groups with cultural differences

Abstract

Many countries have introduced fiscal institutions (fiscal rules and fiscal councils) to deter fiscal indiscipline, reduce macroeconomic forecasting bias and enhance the credibility of fiscal policy. In this study, we use a theoretical model in order to examine how the existence of a fiscal council can reduce a country’s debt. In addition, we examine the impact of fiscal institutions on primary balance in 2 European country groups (PIIGCS and DFGNS countries) that have cultural differences. The analysis builds on panel data estimation methods of fixed effects and random effects depending on the Hausman test results. This study finds that the fiscal institutional context (frifc) has a positive and significant effect on PB. More specifically, we find that one change in fiscal institutional context improves PB by a factor of 0.925 and 1.181 in PIIGCS countries and DFGNS countries, respectively.